1. Shannon Xinchuang: China's leading storage and distribution enterprise

Shannon Xinchuang is mainly engaged in electronic component distribution business. The company currently has the ability to provide electronic component products such as data memory, main control chips, and modules. The products are widely used in cloud computing storage (data center servers), mobile phones, televisions, automotive products, smart wearables, and the Internet of Things.

The company has accumulated many high-quality original factory licensing qualifications, and has successively obtained authorized agency rights from SK Hynix, one of the world's top three industry-wide memory suppliers, MTK, the world-famous main control chip brand, and GigaDevice (GigaDevice), a leading manufacturer in the domestic memory control chip field, forming an advantage of the original factory agency line. The company now has the ability to provide electronic component products such as data memories, main control chips, modules, etc., and the products are widely used in various fields.

The company combines the performance of original products with the functional requirements of downstream customer terminal products, and has strong market development capabilities in various downstream segments. Currently, customers are mainly Internet cloud service providers such as Alibaba, Zhongba Group, ByteDance, Huaqin Communications, and hyperfusion, and large domestic ODM companies, which have achieved coverage of top manufacturers in these fields and have leading customer advantages.

About 95% of the company's revenue for the full year of 2022 comes from the electronic component distribution business. The company's main agent products are SK Hynix's memory and MTK MediaTek's main control chip. The ratio of the former to the latter is roughly 80% and 20%. Among memories, DRAM accounts for about 70%, and NAND and SSD services account for about 30%.

Currently, the main supplier of HBM products is SK Hynix. Hynix has signed agency rights for all products with its agents, and the company has HBM agency qualifications as one of its agents. The company will sell HBM products in 2022. In the future, according to downstream customer needs, it will continue to form corresponding sales on the premise that supply from the original factory is guaranteed.

2. Multiple parties join forces to lay out enterprise-grade SSD business

On May 26, 2023, Shannon Xinchuang issued the “Notice Concerning Foreign Investment to Establish Holding Subsidiaries and Related Transactions”.

Shannon Xinchuang Technology Co., Ltd. (hereinafter referred to as “Party A”) and Shenzhen Dapu Microelectronics Technology Co., Ltd. (hereinafter referred to as “Party B”), Jiangsu Yuquan Junhai Rongxin Investment Partnership (hereinafter referred to as “Party C”) (hereinafter referred to as “Party C”) (hereinafter referred to as “Party A”), and Shenzhen Xinlianpu Investment Partnership (hereinafter referred to as “Party A”) signed the “Shenzhen Investment Framework Agreement” to jointly initiate the establishment of Haipu Storage Technology Co., Ltd. (hereinafter referred to as “Party”) (“Hyper Storage” for short).

The registered capital of Haipu Storage is RMB 10,000 million, of which Shannon Xinchuang invested 35 million yuan, accounting for 35% of the registered capital; Party B invested 20 million yuan in monetary capital, accounting for 20% of the registered capital; Party C invested 15 million yuan in monetary capital, accounting for 15% of the registered capital; Party Ding invested 15 million yuan in monetary capital, accounting for 15% of the registered capital; and Party E invested 15 million yuan in monetary capital, accounting for 15% of the registered capital.

The co-funder Wu Party's executive partner is Mr. Huang Zewei. Mr. Huang Zewei is the director and co-chairman of the company. He holds 23.1 million shares of Shannon Xinchuang's listed company, accounting for 5.05% of Shannon Xinchuang's total share capital. He is a related party of the company.

The rapid development of new industries such as social media, big data analysis, high-definition video, and cloud computing has brought about the demand for data storage with high-speed access. In particular, the rise of cloud storage has increased the use of enterprise data, and the shift in data demand in the downstream industry has led to rapid growth in enterprise-grade SSDs. According to iResearch, enterprise SSD downstream customers mainly come from cloud computing, accounting for 67% of the total market size. Driven by demand from cloud computing and the digital economy, China's enterprise-grade storage market is growing steadily, and storage capacity continues to rise. iResearch predicts that by 2026, China's enterprise solid-state drive market will increase to 66.9 billion yuan, with a compound growth rate of about 23.7% during the period from 2022 to 2026, while the PCIe solid-state drive market share will further increase to 89.3% in 2026. According to Jibang Consulting, in the next five years, users of very large data centers represented by Alibaba, Tencent, Baidu, etc. will become a huge demand for enterprise-grade SSDs. SSDs with larger capacity, faster speed, better security, and more stylish appearance will become a new value proposition.

Haipu Storage's proposed business is mainly the design, production and sale of SSD storage products. Currently, China's enterprise-grade SSD market has a low localization rate and has been monopolized by international manufacturers for a long time. As the country's emphasis on autonomous and controllable data security continues to increase, the demand for localized replacement of memory as a direct carrier for data storage is becoming more and more intense. By integrating top resources in the global industry as a starting point, Haipu Storage designs and industrializes enterprise-grade SSDs equipped with domestic master control chips and domestic firmware. Through technology accumulation in the medium to long term, it establishes domestic enterprise-level storage technology standards and establishes a localized brand, breaking the technology monopoly and promoting the domestic replacement process of enterprise SSDs in China.

With the advantages that Shannon Xinchuang has accumulated over the years in terms of resources, experience, customers, etc., Haipu Storage will integrate suppliers such as flash memory particles, firmware, interfaces, PCB boards, etc., and upstream and downstream links with Internet, cloud computing, finance, communications, automotive and other application customers to actively promote the development and industrialization of enterprise-grade SSDs, in line with the development strategy layout of Shannon Xinchuang's future plans, and help achieve the collaborative development of the entire semiconductor industry chain.

Haipu Storage completed registration on May 30, 2023, carried out sample testing, and then carried out product verification work for downstream customers one after another.

Haip Storage's enterprise-grade SSD products plan to use SK Hynix's NAND particles and Dapumicro's main control chip. The product is currently still in the testing and verification stage. It has certain technical advantages in terms of parameters such as sequential reading and random reading and writing, and power consumption in specific environments. The product will continue to be corrected and debugged in the future, and it is expected that product performance will be further improved after mass production.

The downstream potential customers of enterprise-grade SSDs are mainly Xinchuang customers, Internet customers, telecom operators, etc. The company plans to first switch from Xinchuang customers based on domestic master control chips. At the same time, based on the good performance of the product, Shannon Xinchuang will also make good use of existing customer resources to provide customers with products with high security and excellent technical performance of the main control chip.

3. Equity incentives show confidence

On January 31, 2024, Shannon Xinchuang announced the “2024 Restricted Stock Incentive Plan”.

The number of restricted shares to be awarded under this incentive plan is 18.3 million shares, accounting for about 3.999% of the company's total share capital of 45,75657.67 million shares on the day the draft incentive plan was announced. Among them, 15.52 million restricted shares were granted for the first time, accounting for about 3.392% of the company's total share capital of 45,75657.67 million shares on the day the draft incentive plan was announced, accounting for 84.809% of the total number of restricted shares to be granted under this incentive plan; 2.78 million shares were reserved, accounting for 0.608% of the company's total share capital of 45,75657.67 million shares on the day the draft incentive plan was announced, accounting for 15.191% of the total number of restricted shares to be granted under this incentive plan.

The grant price for restricted shares granted for the first time under this incentive plan is 16.30 yuan/share.

4. The controlling shareholder transferred about 15.2% of the shares to Wuxi State-owned Assets, Huang Zewei, and Fang Haibo with 24.80 yuan/share and 24.65 yuan/share. There was no change in the actual controller

1. On January 16, 2024, one of the controlling shareholders of Shannon Xinchuang Technology Co., Ltd., Shenzhen Lingchi Cornerstone Equity Investment Fund Partnership (Limited Partnership) and Shenzhen Xinlianpu Investment Partnership (Limited Partnership) signed the “Share Transfer Agreement on Shannon Xinchuang Technology Co., Ltd.” to transfer the holding of 22,878,290 shares (5.00% of the company's total share capital) to Xinlianpu through an agreement transfer at a price of 24.80 yuan/share. The total amount is 567,381,592.00 yuan. The above agreement takes effect on the date it is signed and signed by the executive partners or authorized representatives of both parties.

2. On January 16, 2024, Lingchi Cornerstone's co-actors Shenzhen Linghui Cornerstone Equity Investment Fund Partnership (Limited Partnership), Wuhu Hongwei Cornerstone Investment Fund Management Partnership (Limited Partnership) and Fang Haibo signed the “Share Transfer Agreement on Shannon Xinchuang Technology Co., Ltd.” to sell their holdings of 16,660,880 shares (3.64% of the company's total share capital) and 6,217,410 shares (accounting for 1.36% of the company's total share capital), a total of 22,788290 (Accounting for the company's total (5.00% of share capital) was transferred to Fang Haibo through an agreed transfer at a price of 24.80 yuan/share, with a total amount of 567,381,592.00 yuan.

The above agreement takes effect on the date it is signed/signed by the legal representative or authorized representative of both parties.

3. After the transfer of the above agreement is completed, Xinlianpu and its co-actors, namely the company's director and co-chairman Huang Zewei, will hold a total of 45,978,290 shares of the company (accounting for 10.05% of the company's total share capital), and Fang Haibo will become more than 5% of the company's shareholders.

4. On January 12, 2024, Linghui Cornerstone and the Wuxi High-tech Zone New Kinetic Energy Industry Development Fund (Limited Partnership) signed the “Share Transfer Agreement for Shannon Xinchuang Technology Co., Ltd.” to transfer 23,793,420 shares of the company's unlimited tradable shares (5.20% of the company's total share capital) to the New Kinetic Energy Fund through an agreement transfer at a price of 24.65 yuan/share. The total amount is 586,507,803.00 yuan.

After the share transfer agreed in the above three share transfer agreements was completed, Linghui Cornerstone and its co-actors, Lingchi Cornerstone, Shenzhen Lingtai Cornerstone Investment Partnership (limited partnership), and Hongwei Cornerstone held 3.10%, 4.52%, 9.19%, and 3.87% of the company's shares respectively. In total, they held 20.68% of the company's shares, which will not cause a change in the company's controlling rights.

On March 1, 2024, the company received the “Securities Transfer Registration Confirmation” issued by the Shenzhen branch of China Securities Registration and Settlement Co., Ltd. provided by New Kinetic Energy Fund and Xinlianpu respectively. The transfer registration procedures for the share transfers of the parties involved in the transaction have been completed, and the transfer date is February 29, 2024.

5. Investment advice

Profit forecast, valuation and rating: The company issued equity incentives, and the future goals are clear. Considering the current upward storage cycle, the company's performance is expected to usher in a period of rapid growth. We maintain our profit forecast for 23-25. We expect the company's revenue for 2023-2025 to be 115.25/153.67/17.486 billion yuan, respectively, and net profit to mother of 333/3.84/429 million yuan, respectively. The PE corresponding to the current market value is 47/41/37 times. Considering the upward cycle of the storage industry starting in 2024, combined with the company's new layout of storage modules, and the company's clear target of equity incentives for future revenue growth, we maintain the company's “gain” rating.

Risk warning: Industry recovery falls short of expectations, storage demand falls short of expectations, and new business expansion falls short of expectations.